Of Late the Indian financial ecosystem has witnessed NBFC crisis. Few Corporates failed to fulfill their obligation of repayment. This has resulted in the rating agencies downgrading the Corporate Papers. The mutual funds which had exposure to these NBFCs and debt papers had to take a haircut. The resulting panic led to NAV drop. While this is not the only reason for the negative returns in mutual funds, there are few non performing mutual funds that have given negative returns. As we all know that Mutual fund investments are subject to market risk and not just MF’s but all securities are subject to such risk. Return comes with a risk and we have to minimise the risk and maximise the profit. For any reason, if your mutual fund is giving negative returns, do not panic. Please evaluate the situation with the following parameters.
How to minimise risk ?
Here are a few ways in which you can minimise the probability of your funds giving negative return and at investment portfolio level, how you can minimise risk. You can do this by following the four steps namely Fund selection, diversification, review & rebalance and by taking a professional advice. While these will not eradicate negative return but can minimize the possibility of its occurrence. Let us know about this in detail.Minimize Risk
How do you select a Mutual Fund ?
The first and foremost thing while investing in mutual funds is Fund selection. There are few mistakes that most of the investors do while choosing a mutual fund. The most common being selecting completely based on past performance. One should understand that the past performance may or may not assure the future returns. The next is Funds selection based purely on ratings, while ignoring individual risk profile. Another is simply investing in top mutual funds to create a portfolio. While these can be a part of a due diligence process before selecting a fund, cannot be a criterion in silo. One should understand the objective of the fund, risk type, tenure and then analyse the underlying assets among other host of things before selecting a fund.
How can Diversification help?
Now that we have understood how not to choose a fund, let us see what to do next. A well-chosen set of funds is not just enough till the time it is diversified. For instance, if you choose a set of 5 good large-cap equity funds, still you are prone to higher risk as all of them have one thing in common – ‘large-cap equity’. Diversification is choosing 5 funds from 5 different asset classes, this way you can minimise the risk. If one fails to perform the other Funds protect the value of your portfolio. Think of an investor who in the recent crisis had only debt funds? So it is always important to have a diversified portfolio. A well-diversified scientifically built mutual fund portfolio can give you good returns at a relatively lower risk.Diversify Now
Periodic Review & Rebalance
Another key aspect of investing in mutual funds and staying profitable is to have constant monitoring of the funds. If not on a daily basis, one should review their investments on a periodic basis. Based on the trigger of the review one should look at rebalancing the portfolio as and when it is necessary. A regular review and rebalance of an investment portfolio adds value to a healthy investment.
What if I already hold one?
If you have an existing Mutual fund investment and have not followed any or one of these steps and see a negative return, you have multiple options to choose from. If it’s a SIP you have options to stop or to continue the fresh accumulation. The other options that you have are to switch to another fund or to redeem your units. If you were to switch the fund, how do you make sure that the problem doesn’t repeat in the new fund. If your choice is to redeem, is it appropriate to do so at a lower NAV or wait. All these options should be consulted with a professional before taking any decision.
So it is important to understand all these factors to ensure your fund does not give a negative return. As an individual, one may not have enough expertise to do all these and hence it is advised to seek the help of Financial Planner who can do this for you. If you have already done all of these and still find your fund not working, you should not be worried because it may be a temporary one. All the above steps will protect the actual value of your investment portfolio.